1. Tyler Cowen provides a strong argument for relying on monetary policy as a stabilization tool:

The greater the number of protected service sector jobs in an economy, the more likely those citizens will oppose inflation. Inflation brings the potential to lower real wages, possibly for good. How many insiders, if they had to renegotiate their current deals, would do just as well?

Get the picture?

This is a neglected cost of protected service sector jobs, namely that the economy’s central bank will face strong political pressures not to inflate even when a looser monetary policy would be welfare-improving.

I’ve already pointed out that this is an argument for switching from inflation to NGDP targeting. But it is also a strong argument for relying more on monetary stimulus than fiscal stimulus. After all, which institution is more susceptible to public pressure against inflation, and which is more shielded from that pressure? Would you rather have to face re-election every 2 years, or every 14 years?

[As an aside, we were all taught in grad school that central banks needed to be independent to resist public pressure to inflate. I’m inclined to discount most public choice explanations of monetary policy failure, and fall back on the “It’s the stupidity, stupid.” explanation.]

One of the things I was a little disappointed about in the recent money and banking controversy was that nobody (IIRC) picked up on my (it’s not original to me) point about asymmetric redeemability.

I’d like to put an end to his disappointment: “Great post Nick, I completely agree.” I hope Nick won’t be disappointed if I said I enjoyed this comment (from “Ritwik”) and his response even better:

Ritwik: “Point being that both the BoC/ BoM can create the medium of exchange, but only BoC defines the medium of account.”

That deserves one of my rare “Hmmmmm’s”. Even before reading that link.

Nick’s newer post actually contemplated the US dollar being pegged to the Canadian dollar. Under that regime a sudden massive increase in the supply of Canadian dollars would cause inflation in the US. Is that because the US medium of account (the Can$) lost value? Or because the dollar peg would force the Fed to inflate the US money supply, causing more inflation here? In other words, is the medium of account or the medium of exchange the “essence of money.” Nick and I can’t agree, and can’t seem to find a definitive natural experiment. (That which is without practical implications, is without philosophical implications?)

3. The commenter “dtoh” recently asked me what would happen “other things equal” if interest rates fell. I replied that other things equal, prices can never change. I vaguely recall Steve Landsburg once criticizing that argument. It is true that in graduate economics we separate out the various effects; the impact of a change in price on consumption, and the impact of the thing that caused the change in price on consumption. But my problem is that I don’t see people doing that, or even being aware of the problem.

Let’s take the recent discussion of whether the interest rate declines of late 2007 and early 2008 caused the oil price spike. To me, that’s a meaningless question unless we know why interest rates fell. If rates fell because of bearish expectations and reduced demand for credit, then you expect the combined impact of the expectations and the lower rates to be less demand for oil, and hence lower oil prices. BTW, that’s exactly what did happen in late 2008, in case anyone finds my argument far-fetched. On the other hand if rates fell because money was “easy” then you’d expect the impact to be higher oil prices. So which was it, and how do we know?

The worst thing to do would be to look at the rate actually targeted by the Fed (the fed funds rate) notice that the Fed dropped that target, and then announce it must be easy money. At a minimum we’d need to ask why the Fed lowered its target. For instance, suppose bearish expectations reduced market rates (longer term) and the Fed cut rates to keep up with the market. They might fear that the Wicksellian equilibrium rate was falling, and that a failure to cut the fed funds target would tighten monetary policy. How could we tell which it was?

In my view the best way to tell would be to look at AD, and NGDP growth. If it was easy money then the AD curve should have shifted right, and NGDP growth should have accelerated. In fact, NGDP growth slowed, indicating the fall in rates wasn’t easy money, but rather reduced demand for credit caused by the housing slump and lower sales of cars, trucks and RVs. So the thing that caused rates to fall lowered AD by more than the fall in interest rates raised AD.

Now I suppose one could argue that NGDP would have fallen even faster if the Fed hadn’t reduced the fed funds target. And in that sense the Fed was to blame for higher oil prices. But I’d consider that a very misleading argument. Rather the Fed prevented the slowdown in US credit demand from depressing oil prices by as much as they otherwise would have depressed those prices. But it’s crazy to argue the Fed reduced market interest rates in late 2007 and early 2008. Rather the Fed slowed the rate at which market rates were falling. With a neutral policy short term rates would have fallen even faster. In December 2007 the Fed cut its target by 1/4%, less than Wall Street had hoped for. Stocks crashed and the economy immediately fell into a (mild) recession. When the Fed saw what was going on they did an emergency meeting in January and cut rates by 125 basis points over two weeks. I suppose someone could call that “easy money” but it would be very misleading. It was tighter than optimal money pushing the economy into recession, at which point T-bond and T-bill yields fell, forcing the Fed to play catch-up if they didn’t want another Great Depression on their hands. Sorry, but I’m not willing to call that “easy money.” Nor will I attribute any oil price changes to that policy.

4. Here’s a video from the recent Kansas City bloggers conference at the Kauffman Foundation. I can’t bear to watch myself, but I have watched Brink Lindsey’s 2 1/2 minute introduction (to panel 1) approximately 137 times, and still haven’t gotten tired of it.

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“I suppose someone could call that “easy money” but it would be very misleading. It was tighter than optimal money pushing the economy into recession, at which point T-bond and T-bill yields fell, forcing the Fed to play catch-up if they didn’t want another Great Depression on their hands. Sorry, but I’m not willing to call that “easy money.” Nor will I attribute any oil price changes to that policy.”

Yes, if low interest rates and liquidity are “easy money” then how has Japan managed a 15 percent deflation in last 20 years and a skyrocketing yen? The whole 20 years interest rates in Japan were nearly at zero and their banks have plenty of liquidity.

Milton F. did say low interest rates are a sign of tight money. But I sense something else is going on too.

Until the Fed announces it is targeting 7 percent growth in NGDP and buying $100 billion a month in government bonds until we get there, I say money is “tight.”

My fellow MM’ers: When you comment here or more importantly, elsewhere, try to refer constantly to Fed “tight money.” The powerful misconception that we have “loose” money currently should be dispelled.

3.
Why do people like Taylor say the Fed’s interest rate cuts, i.e., “easy money” caused oil to go from $75 to $150 in early ’08, but DON’T say that “tight money” caused oil to down from $150 to $30 in late ’08?

If the Fed makes oil go up, but banking malfeasance makes oil go down, shouldn’t we all be rooting for more banking malfeasance? (he says dripping with sarcasm.)

4. Good job at the bloggers confab. The only thing I “couldn’t bear to watch” was the lack of audio/visual sync.

Also, I’m surprised by how many people don’t yet believe that interest rates are going to stay very low for a long time. I too am worried that the economy will relapse as soon as the Fed signals exit, and that the Fed won’t know what to do at the point, or worse, will stick to its guns out of pride.

After watching the panel discussion on income equality were you somewhat displeased to see that the panel failed to discuss income in terms of consumption vs. saving/investment? (At least Cowen brought up happiness!) If you were on the panel would you have hashed out your rhetoric from the “Income: A meaningless, misleading, and pernicious concept” post arguing that the relevant metric at hand is consumption inequality?

Patrick, I think that may have been under the influence of few University of Chicago economists–but not Milton Friedman, who favored floating rates.

Steve, Good point about the early exit–but I’d bet Bernanke holds the line until 2014 (when his term is up.) After all, he studied the early exit of 1937 in the Depression, and saw Trichet’s early exit of April 2011. I think he sees the risk.

Morgan, Next year I’ll be better prepared. I now realize the thing to do isn’t to summarize my views, but to throw out something provocative. I should have blamed Summers for the fiasco, arguing he failed to advise Obama to put people on the Fed who would stimulate in 2009. It would have been fun to get DeLong’s reaction.

TylerG, Yes, but I didn’t ask any questions. In that format it’s hard to make subtle points–I’d rather discuss those kind of issues later with people one-on-one.

@46:00 am i imagining it, or did DeLong mostly agree that oil price shocks are contractionary when they influence macro policy, and so in 2008, by implication when demand fell (cause the Fed was reacting to inflation) it was therefore monetary policy.

mmm, at what point? the clash (in the debate sense) was very small in my opinion. he said he thinks the Fed is “considerably more intertial than Scott does” right after (about @10)… but I see far more agreement than disagreement. He spends some time talking about about how the hawks are blocking Bens 2003 playbook. If he wanted to talk about fiscal policy he could have also talked about govt spending that passes the cost-benefit (in his paper) that would make sense even if the fed offset (but he didn’t).

I’m mostly with you on point 3. Prices can’t change all else being equal. Prices change as a result of the supply or demand curves shifting. The only part of disagreement is with regards to the emergency 125ps cut in January 2008. That was in reaction to a sharp decline in European markets associated with the wind-down of a French rogue trader that the Fed mis-interpreted as a real collapse in equities. Many market participants at the time thought it was an over-reaction. They made the right choice to cut rates ex post, but not for the right reasons.

Oddly enough, central banks today are asphyxiating their economies in all the democracies (Japan, USA and Europe) while in commie China they are going great guns on more money—and getting more growth.

Remember, central bankers and their staffs have sinecures in stable wage institutions. If they are truly independent, then central bankers and staffers would prefer low growth and inflation to robust growth and moderate inflation.

Too simple an answer?

Our Founding Fathers, who were indebted borrowers (farmers, esp. Madison and Washington) stuck a bankruptcy provision right into the Constitution! You have a constitutional right to declare bankruptcy.

So you think central banker don’t wonder how their pay would fare in a moderate inflation environment?

I thought Cowen himself is an inflation hawk, now he’s saying service sector workers are inflation hawks? I acdtually do agree that can be true and wrote a post about this very probelm yesterday-that inflation in a bad recession is welfare enhancing yet many in their immediate interests oppose it.

central bankers and their staffs have sinecures in stable wage institutions. If they are truly independent, then central bankers and staffers would prefer low growth and inflation to robust growth and moderate inflation. Too simple an answer?

I think if you asked them they’d deny they are biased in that manner, and if you gave them a lie detector test about it they’d pass.

But it would be very easy for them to implicitly adopt that world view in all sincerity, and act accordingly. Nothing is easier than to genuinely believe what is good for you is good for the world. Entirely plausible.

And I bet their attitude would change visibly if getting pay-for-performance for a NGDP or some other growth target.

However Scott, I will push back a little on your premise here that monetary policy makers don’t face the political constraints that fiscal policy makers do.

If so why have they not been able to do more as you believe Fed policy has been too tight throughout this crisis? They have certainly suffered political pressure from the GOP-Perry and the Congressmen. I mean when we get into “treating you ugly” how much more do you want in pressure.

Yes I understand the Fed chairman gets a long term but nevertheless he is appointed by the President and has to be confiremd by the President. Congress can at any pointt change/reduce it’s mandate.

What were the factors that stopped the Fed in doing what it needed to do? It’s been argued that groupthink had a lot to do with it. Krugman had a good ananlysis of all this.

I should have blamed Summers for the fiasco, arguing he failed to advise Obama to put people on the Fed who would stimulate in 2009.

Dang right! (And I don’t mean “dang”.)

I think this should be a campaign issue. Seriously. I just saw Romney blaming Obama for not having any plan to get the economy recovering, but he *didn’t* say this.

Someone should ask Obama outright, “In the worst crisis in 70 years, why did you leave *two* seats on the Fed’s BoG empty?”

What’s he going to say? “Larry told me to do it”, “I didn’t trust the Fed”, “What’s the BoG?” … What?? I’d really like to hear. Both the truth and the excuse.

This is an issue the average person could really understand, unlike all the other technical stimulus-econo arguments. I say, really, start lobbying reporters, op-ed writers, bloggers to ask this. It deserves an answer, on the merits.

> It would have been fun to get DeLong’s reaction.

I think he might have been surprisingly as critical of Obama as he could politically be. My memory is Krugman and DeLong made some unhappy mutterings about this at the time. For Krugman, Obama’s always been a second-best choice, and DeLong usually follows in PK’s footsteps.

I don’t know if he have had the nerve to imply anything critical about Summers.

I like this thread. I forgot to mention I really really like/agree with your point about the economics profession being to blame and the Fed merely reflecting that.

I also like Morgan’s point about Summers. I’d like to see you challenge DeLong (and Krugman and Taylor) more directly but I realize that you’d prefer to persuade rather than criticize.

Ditto to Jim Glass’ points about the CB staffers, too. Major_$&***** took the night off and suddenly I agree with the commenters too?

In current events, I found these quotes worrying:
“Premature Bundesbank calls for an ECB exit strategy have now triggered a new round of market wobbles, with a focus on Spain”
AND
‘it [the ECB] will pay “particular attention to any signs of pass-through from energy prices to wages.”’

I’m not sure I understand your point #3. It is very intuitive to say that prices don’t change, other things being equal. But if the interest rate changes, that is a price change. So aren’t we really asking, “What would happen if one price changed, all other things being equal?”

And if so, wouldn’t a change in interest rates soon start working its way through the economy, starting with every market in which interest rates play a big role?

On Chile, exchange rate pegs and Milton Friedman, F + S discuss that in “Money Mischief”, particularly in comparison to Israel’s experiences with pegging the dollar. The lesson being, IIRC, that whether or not exchange rate pegs have good outcomes depends a lot on when they are adopted e.g. Chile targeted the dollar rate at about the worst possible time since the 1930s.

1) From a modeling point of view, I think it somewhat simpler to think in terms of asset prices rather than interest rates.

2) If you want to use interest rates as an indicator, you need to look at the delta between nominal interest rates and the NGDP growth rate. (I think you agree with this).

3) I don’t think you need to test whether people will exchange financial assets for real assets if the relative price of financial assets increases. It is just one of the fundamental assumptions underlying economics, and it seems obvious that this is way people behave.

4) Accordingly, if the Fed wants to increase spending (consumption and savings) above what it would be absent Fed action, it merely has to raise asset prices, which it does through OMP.

5) This is has the ancillary effect of increasing MB, but I continue to believe that it is the increase in asset prices which drives increased spending….not the increase in money.

6) Separately, Fed action can influence expectations thus shifting the curve (but this depends on whether the Fed is more or less aggressive than what the market is expecting.)

One of the reason for looking at asset prices rather than rates is that mathematically at lower rates, the same change in rates has a much smaller impact on prices. The price (both current and expected future price) is what effects behavior.

Focusing on rates may lead to people making the assumption that a change is fairly large, which when in fact converted into price of the asset is not very significant.

One point that some people seem unaware of is that Petroleum is only about 5% of GDP. So it can rise and fall on its own without being a sign of inflation or causing inflation driving the economy very much.

You say “other things being equal, prices can never change.” This has to be right. You’ve made this point brilliantly before, most notably here: http://www.themoneyillusion.com/?p=1993 (“Of course something else changed, how else could the price/interest rate/exchange rate have changed in the first place!”)

In fact, one of the many useful things I’ve learned from you is “never reason from a price change.”

So that’s why I get puzzled when I look at the textbook money demand curve, drawn in interest rate-quantity space. It’s a downward-sloping curve: the lower the interest rate, the greater the quantity of money demanded.

But why did the interest rate change? Suppose some business sector discovers a new product technology and wants to borrow for new production. The demand curve for loanable funds shifts rightward. All else equal, the interest rate rises.

Is the quantity of money demanded really *lower* at this new, higher interest rate? Seems to me that, all else equal, this technological development should increase output, and the quantity of money demanded should *increase* under this scenario. But this is the opposite of what the textbook money demand curve shows.

So what’s being held equal and what isn’t? As you point out, when the interest rate changes, there’s no coherent sense in which all else could be equal.

I spent the evening thinking about it and I’m even more convinced I’m on to something:

What Delong and Summers are arguing is that The Fed is too politically timid to rely on Monetary alone.

But really think about what Bold Ben would have said in a perfect world, and the Democrat response.

He’d have told Obama and Congress not to do Fiscal Stimulus, he’d say there’s not really any shovel-ready jobs, and the expectation of future tax increases yada ydada, and since he’s going to do what it takes on the Monetary side the multiplier is ZERO.

And WHEN DeKrugman, Obama, and Pelosi heard that back in 2009, they would gone parabolspastic.

They’d SCREAM bloody god damn murder that the Fed was trying to run the government.

Meanwhile, Ben would have been able to say to the GOP:

I will go tell Obama and pals to eat it on their state cash transfers to public employees (non-tax cut STIMULUS), BUT I’m going to be adopting NGDPLT in the process.

—-

In that situation, my compass says the real fight comes from the left, not the right.

The think the Tea Party still happens around Health Care, and there’s some bitching about the Fed, BUT I am pretty damn sure guys like me, Kudlow, and Rush Limbaugh explain that NGDPLT is actually a strong conservative KING DOLLAR policy long term that crushes the dreams of Barney Frank forever…. and the Tea Party is smart enough to understand it.

And because Obama, Pelosi, and DeKrugman are smart enough to understand it to they regress and become Old Keynesians.

—–

THIS IS THE MORALE OF THE STORY:

When you get into end game discussions where Summer and DeLong, and others, are arguing about WHY Ben didn’t go with his BOJ thinking….

And they use this argument to try and DISPROVE NGDPLT… which is HAPPENING right now.

Scott, you do have to get down into WHY Ben could have actually done this politically.

AND THAT MEANS finally being straight-forward that this is the best play for conservatives fighting more governemnt growth.

Morgan, Yes, liberals would be outraged if Bernanke said don’t do fiscal stimulus. I’m outraged if he doesn’t say don’t do fiscal stimulus.

cassander, I agree.

dwb, Well DeLong favors fiscal stimuluis and I don’t (unless it boosts AS) so that’s a pretty significant difference. Obviously we both favor monetary stimulus, and both believe fiscal stimulus is useless whn rates aren’t at zero.

John Hall, I’d say the market thought the Fed should have done even more cuts in 2008, but I agree that some market participants thought the Fed over-reacted. I put more weight on the markets, then on market participants.

Ben, Yup, it’s not just the Fed.

Mike Sax, Cowen supports my call for monetary stimulus, so he’s only an inflation hawk in the sense that I am an inflation hawk–which I certainly was in the 1970s.

You said;

“If so why have they not been able to do more as you believe Fed policy has been too tight throughout this crisis? They have certainly suffered political pressure from the GOP-Perry and the Congressmen. I mean when we get into “treating you ugly” how much more do you want in pressure.”

If you are right, that supports my point. Congress is even worse than the Fed. The Fed might not always do exactly what Congress wants (fortunately), but Congress will always do exactly what Congress wants (unfortunately).

Jim, Good point.

Steve, That European report sounds very worrisome. I have a feeling this crisis will be with us for quite a long time.

Ryan, An increase in interest rates right now could be good or bad news depending on why it occurs. If it represents tight money it’s bad news, if it represents faster growth it’s good news.

W. Peden, Good point.

dtoh, 2. I agree.

3. I’m still confused. In aggregate, people never exchange financial assets for real assets.

5. In the long run it’s 100% hot potato effect, but the short run I’d rather leave it in the black box.

Floccina, I agree.

MR, You have to work through it all in a general equilbirium framework, but most people take shortcuts. Even I take shortcuts sometimes.

Morgan, Good point, A Bold Ben would have won over the conservatives.

Mkie Sax. I call the D&S paper “excellent” and he calls my post a “blistering attack.” I wonder what he thinks of DeLong’s blog!!

I didn’t say we were a banana republic, I said the liberal pro-fiscal stimulus view only makes sense under that assumption. And you can’t beat something with nothing. Until he describes his prefered monetary regime there’s no way for me to even respond to that sort of post.

Well DeLong favors fiscal stimuluis and I don’t (unless it boosts AS) so that’s a pretty significant difference. Obviously we both favor monetary stimulus, and both believe fiscal stimulus is useless whn rates aren’t at zero

i completely agree that its a significant difference: the clash is very evident on the blogosphere, all i am saying is that on the video the clash appeared de minimus to my ears and eyes. He ended with “points of disagreement were minor.”. I expected a boxing match but got a big group hug.

I had hoped to hear why he thought the fiscal multiplier was positive: for example, is the inflation target is not high enough, or is the Fed going to screw up assymetrically (i.e. behave inertially and NOT lean against stimulus)?

Somewhere in the back of my mind i think he makes the calculation: yes the Fed might lean against fiscal policy making the multiplier zero, but so what? AD still goes up; Someday when the economy has normalized maybe we’ll cut back. less of an economics point and more of a political one. JMO.

The GOP wants The American Taxpayer to subsidize gas for the rest of the world.
The GOP is claiming that our tax subsidies to big oil, are in effect buying down the cost of gas for Americans.
But since oil is fungible, American tax subsidies are buying down the cost of gas for the whole world…and since we only consume about 20% of the world’s oil that means that 80 % of the subsidies are sent overseas .

Scott,
You said;
“I’m still confused. In aggregate, people never exchange financial assets for real assets.”

Since there is always a borrower and a lender, there is no such thing as a financial asset, since the asset is always offset by a liability, which will net to zero.

But if you sell me a textbook, and I give you a promissory note, or a Tbill, or iTunes card, or a Federal Reserve Note, then I have exchanged a financial asset for a real asset. Except for barter any time you buy a real asset or service, it’s done in exchange for a financial asset.

Maybe there is a nomenclature issue, but when the price of financials assets go up, I’m more likely to exchange them for your textbook.

dwb,
I think if DeLong had more time to speak, he would have laid out some of his arguments. As it was, he didn’t even use all his initial allotted time to debate Scott, and turned to the ‘longer term’ discussion between Tyler and Karl! It’s interesting though, how DeLong seems more willing to be aggressive in the blogosphere, than in person.

Scott,
Ritwik was one of the few commenters at Nick’s site I really respected. He/she always had carefully reasoned comments with references and although I didn’t always agree I always felt they were worthy of a well thought out response.

Benjamin C: Oddly enough, central banks today are asphyxiating their economies in all the democracies (Japan, USA and Europe) while in commie China they are going great guns on more money—and getting more growth. Not in Australia. The RBA does a form of explicit inflation targeting that is really NGDP targeting by another name. (Since if y surges, they push down on P and if y weakens, they loosen on P.)

When the housing bust eventually comes, it is going to be ugly, but not disastrous because I am betting the RBA will not make things worse by tightening money during an asset price bust.

Sure, as with any demand curve, you can move up and down the curve, but there are also things that will shift the curve or change it’s shape.The most important one is probably expectations of NGDP growth.

The worst thing to do would be to look at the rate actually targeted by the Fed (the fed funds rate) notice that the Fed dropped that target, and then announce it must be easy money. At a minimum we’d need to ask why the Fed lowered its target. For instance, suppose bearish expectations reduced market rates (longer term) and the Fed cut rates to keep up with the market. They might fear that the Wicksellian equilibrium rate was falling, and that a failure to cut the fed funds target would tighten monetary policy. How could we tell which it was?

You have to ask how the Fed actually goes about lowering the target rate. They don’t control the fed funds rate directly, they inflate slower or faster into the banking system, until the banks change the rate themselves.

So if the Fed is going to bring the rate down from where it was before, you have to ask whether or not they did so by inflating or deflating bank reserves. You can figure this out by looking at the Fed’s purchasing of securities from the primary dealers, and other financial institutions, as well as loans from the discount window.

If one calls the Fed buying securities and lending through the discount window “loose money”, then the Fed has been engaging in loose monetary policy since 1913. If you call the Fed letting NGDP fall “tight money”, then the Fed “tightened” after 2008 until 2011.

In other words, it all depends on the definition you have for “loose money.”

Personally, I define loose money as any money the Fed creates beyond the rate of precious metals production of gold and silver.

In relative terms however, if we want to figure out if the Fed is looseNING, or tightENING, then I say we should look at the rate at which the Fed is creating money by buying securities and making loans through the discount window over a period of time. If one year they bought and loaned out $100 billion, and in the next year they bought and loaned out $200 billion, then I say the Fed “loosened”, regardless of interest rates, regardless of bank reserves, regardless of M2/M3. If M2/M3 increased, then I will say the Federal Reserve System “loosened”, regardless of what the Fed in particular did (although there is a strong correlation between Federal Reserve loosening and Federal Reserve System loosening, since the latter is caused by the former).

You define “loosening” and “tightening” according to what happens to NGDP over time. If that is your definition, then yes, it will be wrong to say the Fed loosened or tightened based solely on the fed funds rate.

The reason why you see a positive correlation between low fed funds rate and stable (real stable, not slowly increasing stable) or reducing NGDP is because, historically, recessionary periods are typically accompanied by people reducing their spending and trying to increase their cash, which puts downward pressure on NGDP, and the Fed typically tries to stave off this correction by lowering the fed funds rate.

It’s not that lower NGDP causes a lower fed funds rate, it’s that a recession typically accompanies a lower NGDP, and a recession is then typically responded to by the Fed by them lowering the fed funds rate. So at any given time, you see inflationary boom periods accompanying a higher fed funds rate (since the Fed typically doesn’t lower the fed funds rate during a boom), and you see deflationary correction periods accompanying a lower fed funds rate (since the Fed typically lowers the fed funds rate during a bust).

The Fed lowering or increasing the fed funds rate LAGS the NGDP going up and down.

If I understand correctly, there’s no role for fiscal policy in stimulating consumption as any expansion in government expenditure would be offset by central banks’ single mandate to combat inflation.

In that order of ideas it seems to make sense to cut budgets as most of Europe is doing currently, and let the central bank handle the problem. After all, there’s no point in increasing budgets, and governments do have to get market credibility back.

The ECB (Mario Draghi) has issued a lot of money to banks in the periphery of the EU against the will of the Bundesbank and German government, and the Bank of England appears to be pursuing NGDP targeting without saying so (I think I read about it in this blog). The Fed may not be doing enough because of its consensual approach, but it is limping in the right direction. If such is the case, two of the largest “engines” of the global economy (EU + USA) seem to be doing the right thing, however reluctantly or half heartedly.

In that order of ideas, in a global context, is Tyler Cowen’s bleak 60% outlook justified? Would India and China’s slowing down offset progress in the EU in a USA? And in a national context, wouldn’t the Cameron/Osborne austerity drive (I seem to recall the UK was first to go that way) be the correct government policy?

MF, The base rose during the early 1930s, it is a very poor indicator of easy and tight money.

Again, it depends on what you define as “loose” and “tight” money.

If you define loose money and tight money as they pertain to M2/M3, then I would agree with you that money was “tight” in the early 1930s despite the Fed drastically expanding base money.

The base rose in the early 1930s because then, just like in 2008, the Fed tried to reinflate the bubble, by expanding base money, but the banks and the people “hoarded” too much aggregate stock money, thus resulting in nominal spending and the money multiplier declining.

The only good indicator for whether money is loose or tight, if you want to define those terms as they pertain to M2/M3, is M2/M3 itself, or, if you want to define loose and tight money it as it pertains to NGDP, then NGDP itself.

Since you define tight and loose money as it pertains to NGDP, then of course base money isn’t going to be a good indicator for you, since base money and NGDP can move in opposite directions. For you, the only adequate indicator for loose and tight money, is NGDP.

Nothing else can serve as a better “indicator” for a variable, than the variable itself!

Since I include cash balances in people’s economic plans, since I do not ignore them, I can say that money is “loose” despite NGDP falling. If people want to hold cash for longer and spend less over time, then money can be loose or tight, depending on how much money is being created, and by whom.

The Fed can loosen while the banks tighten, and vice versa, which can have the net effect of “money” loosening or tightening.

If we focus on the Fed, then they loosen when they increase bank reserves.

If we focus on the banks, then they loosen when they expand credit.

If we focus on “aggregate money stock”, then “money” loosens or tightens when the Federal Reserve System expands “money” as such, or base plus credit.

If the Fed isn’t even targeting NGDP, then if NGDP fell you can’t say they tightened.

[…] Sumner has sometimes – I guess in frustration – suggested that central bankers are just stupid and this is the reason why mistaken monetary policies are […]

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Welcome to a new blog on the endlessly perplexing problem of monetary policy. You’ll quickly notice that I am not a natural blogger, yet I feel compelled by recent events to give it a shot. Read more...

Bio

My name is Scott Sumner and I have taught economics at Bentley University for the past 27 years. I earned a BA in economics at Wisconsin and a PhD at Chicago. My research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis.